Trading Mentality Guide
Table of Contents
Introduction
Mentality is arguably the most important aspect on your journey towards becoming a profitable trader. Emotions when trying to execute trades runs counter to the needed discipline of successful trading.
Our goal is to continuously identify ways to improve our trading mentality and build fortitude in different situations. Some ways to do this are:
- 1. Have a trading checklist. When you have a defined set of rules it is easier to have confidence entering your trades.
- 2. Paper trade. Practice practice practice. Get accustomed to entering and exiting trades. Treat this as real money and you will have success.
- 3. Have proper risk management. If you are entering trades with a defined loss that you will be okay losing the stress of your trade turning the wrong direction.
1. It’s known that fear and greed have a large impact on a traders judgment, often leading to disappointing decisions that they later regret.
2. Avoid “revenge trading” all all costs. This is common mistake traders make after experiencing a larger losses in their portfolio which can lead to greater risk in future trades.
3. The stock market should not be treated as a casino, where traders feel that one trade will hit the jackpot and must remember this is a marathon not a sprint. Just like a casino the odds are not in your favor when you are gambling.
4. Do not let FOMO control your trading. There will always be another trade. You can catch a pullback for entry or catch an inverse move when the impulse is coming to an end. Do not get blinded by a play happening without you.
Trading should not be discouraging when the results are not what you are expecting. But rather take it as an opportunity to grow individually and implement new strategies to build your path.
1. Journal your plays to ensure clarity on mistakes made and recognize patterns.
2. Reevaluate your rules as you go. Nothing is set in stone so adjust to improve.
3. Never stop learning. No matter how well you are doing there is always room to improve. Have a hunger for education.
Trading Checklist
Before you enter a trade:
- Are we in a range?
- Where is the higher timeframe supply and demand?
- What is out current VOLD ratio? Is NYSE or NASDAQ Vold Leading?
- What stocks are leading us down?
- What stocks are leading us up?
- What sectors are those stocks in?
- Is there a divergence? (VOLD/ADD, Tech/Energy, NYSE/NASDAQ/RTY, SPY/VIXY, SPY/DXY)
When entering a trade:
- What is my invalidation level?
- What is my first price target?
- What is my risk to reward profile in this trade? (amount at risk vs amount you can make if you hit PT)
- What am I looking for to validate this trade?
- What am I looking for to invalidate this trade?
Journaling
As most broker accounts make it easy to track our profit and losses automatically, we tend to ignore analyzing each stock trade or creating a personalized journal to track our performance. The process of reviewing each of your historical trades helps evolve our trading to become more successful along the journey to not only understand your mistakes or bad habits but also develop new strategies.
1. Learn to identify, review, and make the necessary adjustments to your weaknesses. The biggest flaw as a trader is not only identifying our individual weaknesses as prior strategies or perhaps luck tends to change over time. By reviewing your past trades, you can understand what specifics worked for your trading in the past or what errors occurred to help you move forward.
2. Utilize a trading journal to set goals on a weekly to monthly basis as you work toward trading for freedom. We all want higher daily to weekly returns on our investments but this about consistency, and a journal can help start targeting small profits in increments of $100 every week.
3. Monitor your risk management as emotions affect each of our trades to hold longer than necessary and increase trade losses. There are times that our losses in any given trade allowed us to manage risk and cut losses at 15-20% but instead held longer with justification. A trading journal allows you to review your recent trades to understand your trade exit which allows for adjustments in the future.
You don’t wait until your portfolio accrues multiple losses before creating a trading journal to provide guidance and monitor your overall performance. Trading journals are a proactive tool not a reactive one.
1. Start with documenting your plan of action to execute your first trade from entry to exit, followed by your profit and loss.
2. Exiting a trade is the difficult part of the trading process but you must be able to determine if it’s the risk or greed that affected your decision and likely the most important aspect of a trading journal to understand proper risk management.
3. The reflection point after the repeated documentation of each of your trades is the most beneficial aspect of keeping a trading journal. Upon reviewing your trades, this is a time to understand how your emotions dictate your prior judgment as you reflect on prior mistakes and losses to alter your trading style for the journey ahead.
We can all point to things that could’ve resulted in a more substantial result then our prior choices have otherwise dictated. It’s small incidents that in a crucial period of time can lead to bad habits and further mistakes down our path as the examples below can present.
1. In the process of identifying your style of trading, there will be times that you find yourself in profits from a day trade and determining the bigger reward for holding a trade position overnight that instead of gaining potentially 20% profit is closed the next morning for -40% loss. As you would reflect on a trade that went from profit to loss as you review this in your trading journal, you must first understand the style of trading that would have benefited and risk management that was likely to exceed from such action.
2. Stock market catalyst can be one of the most rewarding circumstances to trade at a given time but the biggest risk to any growing stock portfolio with many unknown factors causing these scenarios to be completely avoided. There are times where a stock’s earnings report can take your trade position over 1000% profit but just as easily destroy your capital to nothing. As you will likely look back at the trading journal, questioning yourself why you executed such trades that affected your growth and did not present the appropriate risk to reward ratio.
Want access to a free journaling Google Sheet? Click here: https://docs.google.com/spreadsheets/d/1eDEkhcI-tWhYTvuwqMURFCOU05umC14qdAlOZdnEnq0/edit?usp=sharing
Simply click file -> make a copy and save it to your own Google drive.
Common Mistakes
- Do not trade every day. Ask yourself if you can only take three trades a week, would this be one of those trades? If the answer is no, then move on. Look at the market in the morning and check if the best trade setup is there. If it is not, walk away and come back later in the day and check again. Limit your trades each day to maximize the quality.
If you have a bad trade, step away and reevaluate. Do not immediately hop into another trade. Take the emotion out of it. If you are risk-managed, there will be more trades to come. You can even consider being done for the day.
Manage risk; only put in what you are willing/ready to lose. Stick to stop-loss levels (actual or mental). Understand that every moment is unique in the market, and no one can predict it. Realize winners and losers are both part of the game, don’t let it affect your mood/how you trade
You can not remove emotion from what you do. What you CAN do is control how you respond to those emotions. Focus on allowing yourself to feel whatever and move past it without making poor decisions.
Make sure you have targets and levels in your plan when you enter. If you are staying in a trade too long, it means you did not respect your plan on when to take profits or stop out. You have a plan, follow it.
1. Learn to scale in and out of plays. Reducing and increasing your position to adjust your risk is key to risk management. The higher your gains, the less you should hold to secure that money. Having room to add to your position as you are in profit is a great way to scale in safely. Averaging down should be avoided.
2. Position sizing; only hold a larger position when you have extreme confidence and confluence in plays, and even then, the size should not exceed 20% of your account (or less). You do not need to have thousands in every play, focus on winning consistently, and even smaller amounts will compound.
3. Learn when to trade and when not to trade. The market is in motion, then it rests; trade accordingly, and don’t diddle in the middle.
4. Realize trading options has the potential for exponential gains and should use that to your advantage. You don’t need to take huge positions in which you are risking too much. Consistent gains over time and compounding growth will lead to success, not a few home run trades.
There is a time and place to let your plays run, but that is not an excuse to be greedy.
Most trades you should be systematically taking profits at your targets and setting a stop loss as you hit your price targets so no trades are going red.
Mark on your chart beforehand where these areas may be and keep an eye on them during a trade.
You can leave runners to ensure you capitalize on the upside while securing the majority of your profits.
Create a checklist for each type of trade and stick to it. Review before every single trade.
Write your mistakes down, speak them out loud, put energy towards solving them.
Use a trading journal, and evaluate every trade you take to see what I did right/wrong and what you can improve on.
